March 20, 2009 2:16 pm

Ideal Standard sponsor Bain hires financial adviser as 2007 LBO falters

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Bain Capital has hired Houlihan Lokey to restructure Ideal Standard, a bathroom fixture maker the private equity shop acquired in 2007 for USD 1.75bn, four sources familiar with the situation told Debtwire. The Belgium-headquartered manufacturer has struggled to implement an extensive operational restructuring programme, and is facing a severe downturn in earnings, noted two of the sources.

“The sponsor’s idea was to move a chunk of [Ideal’s] production to Eastern Europe and Asia and aggressively strip costs out of the business,” explained one of the sources. But poor transitioning and the economic slowdown undermined the relocation plan and the anticipated efficiencies never materialized.

The financial strategy backing the LBO also foundered early on as underwriters Credit Suisse and Bank of America struggled to place the USD 1.55bn debt package supporting the acquisition. Bain later tried to de-lever the company by repurchasing much of the junior debt funding the LBO but Houlihan’s hire augers more restructuring to come.

The mandate was awarded earlier this week, other advisers who pitched included Rothschild, Close Brothers and Lazard, the sources said.

“Ideal’s markets are collapsing, their plan was to drive value via an operational restructuring, as opposed to boosting top-line revenues,” said a second source. The problem is that there was too much debt attached to the business and Bain now has a 10-man strong operational team working on this full time, he said.

“They built a big plant in Bulgaria, but the transfer has not been terribly successful,” said the first source. Ideal’s Italian operations also caused problems because of product range miscalculations and structural problems, he added.

“Seventy-percent of EBITDA comes from Italy and UK split 50:50 – Italy was particularly troublesome,” said the third source.

Kitchen sink liability management

Bain Capital acquired the global bath and kitchens business of US-based American Standard, known as Ideal Standard in Europe, in October 2007. Initial attempts by lead arrangers Credit Suisse and Bank of America to syndicate the USD 1.55bn of acquisition financing met with a muted response from investors.

Credit Suisse in the summer of 2008, began marketing the hung deal to a select number of accounts, offering senior paper in the mid 80s. Total leverage was 9x based on March 2008 EBITDA and 5.5x through the senior, said the sources. A portion of the senior debt eventually ended up in hedge fund hands, trading in the high 60s to low 70s, commented the second source.

Shortly after the senior selldown, Bain executed a buyback of USD 290m in mezzanine debt, said three of the sources. The junior debt was almost exclusively held by the lead arrangers and was repurchased in the 90s, deleveraging the original deal, noted the first source.

“Bain did provide additional support to the deal – by doing some pretty funky things to the capital structure,” said the second source.

The LBO financing carries leverage and interest cover covenants, with five EBITDA cures permitted during the life of the deal but no more than twice a year, said the second and a fourth source. In addition, there is a mulligan, and the documentation in theory could allow a Mauser-style debt buyback, noted the fourth source. German packaging manufacturer Mauser recently repurchased debt and applied the debt reduction as an equity cure for covenant purposes.

Ideal produced EUR 270m of EBITDA in 2007 and the financing was marked with projections for EUR EUR 235m of EBITDA for 2008, rising to EUR 316m by 2012, said a third source. However, as at the end of September 2008, run rate EBITDA was just EUR 158m, noted the second source. “This could easily drop to EUR 120m to EUR 130m this year,” he commented.

If EBITDA drops to EUR 120m, the company would be 8.4x leveraged through the senior, the seniors would be nearly underwater, said the fourth source.

“The company is heavily exposed to the UK market in which they are number one, with Sanitec placed at number two,” explained the first source. “Sales could easily fall by another 30% in 2009. Replacement fittings accounts for 60% of their business, with Wolseley being their largest customer, he added.

Ideal Standard’s main European competitors are Sanitec and Grohe, both of which forecast sharp slowdown in earnings this year. Sanitec issued guidance for 2009 earnings to more than halve this year to EUR 64.7m, and trough at EUR 56.5m in 2010, this newswire previously reported.

Sanitec senior lenders are formulating their own restructuring proposal after sponsor EQT stunned investors in December by suggesting a 60% haircut to senior lenders and wiping out junior debt in return for a EUR 100m new money investment.

Ideal Standard’s senior facilities include a USD 157m term loan A and a USD 910m term loan B. The term loan B pays Libor+ 325bps. In addition there is a USD 125m revolver and a capex facility. At time of launch, there was also a USD 290m mezzanine paying 3.5% cash/5.5% PIK. No prices have been seen in the secondary market, say market participants.

Bain Capital could not be reached for comment.

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